Investors don’t need look too closely to see that Alibaba Group Holding Ltd (NYSE:BABA) is headed toward a higher valuation than both Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB). As BABA stock has almost doubled in price this year, it’s pushed the company’s market cap to close to $440 billion.
The Amazon.com comparison is important because Alibaba is often described as the Chinese Amazon; but not exactly. BABA was not built to hold inventory or handle logistics. It was built to allow small suppliers to reach global markets. Only now, through its own TMall, has it begun building out a physical infrastructure.
Another difference is that Alibaba is far more profitable than Amazon and this has fueled the stock’s rise. BABA stock is up an eye-popping 96% this year, while Amazon has gained 17%, taking the Seattle company’s market cap to just shy of $465 billion.
Where does Alibaba stock go from here?
Feel the Love
Here at InvestorPlace, we’re all believers in the Alibaba story. Larry Ramer calls it a screaming buy. Even the units that are losing money, like digital media, are showing enormous growth, while its cloud is now profitable and it is surging internationally. The company is only getting started, adds Luce Emerson.
The recent dip in the stock, along with other NASDAQ leaders, may be your last best chance to get in, writes Tyler Craig. The near-$10 a share decline still leaves it above its 20-day moving average, which is going up like a rocket. Joseph Hargett has a $250 price target on the stock.
Want a another opinion? Four of the highest-ranked stock pickers on data engine TipRanks.com have a price target of $200 or higher on BABA stock.
Or, you can get fat profits by using options, as Nicholas Chahine has described. Sell the $130 put or do a spread trade, selling the $130-$125 credit put spread, should be easy money, he writes.
The Real Chinese Amazon
If you really want the Chinese Amazon, you don’t want Alibaba at all. You want to buy JD.com Inc (ADR) (NASDAQ:JD), which until early August had been outperforming BABA. It fell after reporting earnings that InvestorPlace colleague Vince Martin saw as good though the market was disappointed after it had bid the stock to more than 100 times earnings.
By holding inventory and building infrastructure, JD.com is actually bigger than Alibaba on the top line, with $13.8 billion in sales last quarter. The difference is that, like Amazon before it scaled, JD.com has to invest ahead of its growth; that cost them about $70 million.
While this put it on sale, Nick Chahine remains very bullish on the company. The 15% drop in the shares made for a great buying opportunity.
By emulating Amazon — building out physical logistics ahead of demand, as Luce Emerson noted — JD.com is building a business that could eventually surpass Alibaba’s market cap, just as it has overtaken it in size. If it did that, you would have what analysts call a 10-bagger, because JD’s market cap today is just $58 billion, barely 10% of BABA. It could prove better than Alibaba and Amazon combined.
The answer, of course, is to buy both.
Bottom Line on BABA Stock
The problem with calling a market a “bubble,” as I did just last month, is that you look stupid as the bubble goes parabolic, and you miss out on the biggest gains.
Both Alibaba and JD.com are buys at current levels, but given that this is a bubble, be aware that when bubbles pop it gets very hard to get out the door. What I, and other Alibaba or JD stock holders have right now, is a paper profit. It’s real only when you sell the stock and get cash in your pocket.
Remember that. Consider some of Nick Chahine’s options strategies to protect yourself from the pop. Amazon eventually justified the faith of those who bought it in 1999. It just took 10 years.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write to him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, FB and AMZN.
